Introduction
Third-party liability in trust law examines when individuals not originally part of a trust arrangement may be held responsible for breaches of trust. This involves two primary doctrines: recipient liability, known as knowing receipt, and accessory liability, known as dishonest assistance. Innocent volunteers—those who inadvertently become involved without wrongful intent—may have defenses available to them. Analyzing these defenses requires a comprehensive understanding of the elements constituting recipient and accessory liability, the requisite knowledge or dishonesty standards, and the equitable principles that may protect an innocent party.
Recipient Liability: The Doctrine of Knowing Receipt
Recipient liability arises when a third party receives trust property that was transferred in breach of trust. The doctrine of knowing receipt holds such recipients accountable if certain conditions are met.
Elements of Knowing Receipt
To establish knowing receipt, the following elements must be proven:
- Receipt of Trust Property: The third party must have received property that originates from a trust.
- Beneficial Receipt: The property must have been received for the recipient's own use or benefit, not merely held on behalf of another.
- Knowledge of the Breach: The recipient must have actual or constructive knowledge that the property was transferred in breach of trust.
- Unconscionability of Retention: Retention of the property must be unconscionable due to the recipient's knowledge of the breach.
In El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, the Court of Appeal outlined these elements, placing importance on the recipient's knowledge in determining liability.
The Knowledge Requirement
The degree of knowledge required for liability in knowing receipt has evolved through case law. In Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2000] 4 All ER 221, it was held that the recipient's knowledge must render it unconscionable for them to retain the benefit of the property.
Illustrative Example
Consider a scenario involving Alex, who receives a significant sum of money from a business associate, unaware that the funds were misappropriated from a trust. If Alex learns of the breach while still in possession of the funds and retains them, he may be liable under knowing receipt. However, if he had no knowledge of the breach and received the funds in good faith, defenses may be available to him.
Accessory Liability: The Doctrine of Dishonest Assistance
Accessory liability pertains to individuals who assist in a breach of trust without necessarily receiving trust property. The doctrine of dishonest assistance focuses on the conduct of the third party in assisting with the breach.
Elements of Dishonest Assistance
To establish liability for dishonest assistance, the following elements must be demonstrated:
- Existence of a Breach of Trust: A breach of trust or fiduciary duty must have occurred.
- Assistance by the Third Party: The third party must have participated in the breach.
- Dishonesty: The assistance must have been provided dishonestly, assessed according to objective standards.
In Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, the Privy Council clarified that dishonesty is to be judged objectively, taking into account the knowledge and experience of the accused.
The Standard of Dishonesty
The standard for dishonesty was further refined in Barlow Clowes International Ltd v Eurotrust International Ltd [2006] 1 WLR 1476. The court held that a person is dishonest if their conduct is dishonest by the ordinary standards of reasonable and honest people, and they were aware that their conduct would be considered dishonest by those standards.
Illustrative Example
Consider Samantha, a solicitor who assists a trustee in transferring trust assets to an unauthorized investment, knowing that it contravenes the terms of the trust. Even if Samantha believes the investment might benefit the beneficiaries, her assistance may be deemed dishonest by objective standards, resulting in accessory liability.
Defenses for Innocent Volunteers
Innocent volunteers—third parties who become involved in a breach of trust without wrongful intent—may invoke certain defenses to protect themselves from liability.
Bona Fide Purchaser for Value Without Notice
A bona fide purchaser for value without notice is a defense available to a person who:
- Acquired the trust property in good faith.
- Provided valuable consideration for the property.
- Had no actual or constructive notice of the breach of trust.
This defense is rooted in the principle that equity will not act against a purchaser who has acted fairly and without knowledge of wrongdoing.
Case Reference
In Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 1 WLR 978, the court upheld the rights of a bona fide purchaser who had no notice of prior equitable interests.
Change of Position
The defense of change of position applies when a recipient has changed their position in reliance on the validity of the received property, making it inequitable to require restitution.
Requirements
- The recipient must have acted in good faith.
- The change of position must be as a result of receiving the property.
- The recipient must not have been at fault in contributing to the mistake.
Case Reference
In Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, the House of Lords recognized the change of position defense, allowing the recipient to retain the benefit where it would be unjust to require repayment.
Illustrative Scenario
Suppose Michael receives funds from a friend, not knowing they were misapplied from a trust. He uses the money to pay for medical expenses. If required to return the funds, Michael would suffer an injustice due to his change of position, potentially invoking this defense.
Ministerial Receipt
A person who acts merely as an intermediary, without benefiting from the trust property, may rely on the defense of ministerial receipt.
Case Reference
In Agip (Africa) Ltd v Jackson [1991] Ch 547, accountants who processed payments without benefiting personally were held not liable under knowing receipt.
Lack of Knowledge
A recipient who genuinely lacks knowledge of the breach and has no reason to suspect wrongdoing may not be held liable.
Illustrative Example
Emily receives a gift of jewelry from a relative, unaware that it was misappropriated from a trust. If she had no reason to doubt the legitimacy of the gift, she may not be held liable under knowing receipt.
Equitable Defenses
Courts may apply equitable principles to prevent injustice, such as:
- Estoppel: Preventing a party from asserting a right when they have induced another to act to their detriment.
- Laches: Denying relief due to unreasonable delay in pursuing a claim.
These defenses recognize the need for fairness in the application of equitable remedies.
Conclusion
The interplay between recipient liability and accessory liability in trust law involves complex considerations of knowledge, dishonesty, and equitable defenses. Recipient liability hinges on the recipient's knowledge of the breach and the unconscionability of retaining the trust property. Accessory liability focuses on the assistance provided to a breach of trust, assessed against an objective standard of honesty.
Defenses available to innocent volunteers are critical in mitigating liability for those who become inadvertently involved in breaches of trust. The bona fide purchaser for value without notice defense protects those who acquire property fairly and without knowledge of wrongdoing. The change of position defense acknowledges situations where requiring restitution would result in injustice due to the recipient's altered circumstances. Ministerial receipt and lack of knowledge further shield individuals who have not benefited personally or were unaware of the breach.
Understanding these concepts is essential for working through the complexities of trust law. The principles governing recipient and accessory liability, coupled with the available defenses, demonstrate how equity strives to balance the interests of beneficiaries with fairness to third parties. Legal practitioners must carefully analyze the facts of each case, the knowledge and actions of the parties involved, and the applicability of equitable defenses to ensure just outcomes.
